Why Invest in Property? Print E-mail

No other investment today can offer the stability, simplicity and potential returns.

  • Simplicity and stability -Investing in property is very different to investing in stocks and bonds. While the Stock Market can offer high potential returns, many investors have found it to be a risky and volatile place, with share prices capable of changing on an hourly basis. This is especially true for the non-professional investor, as there are many hidden external factors that can effect a financial investment. Added to this, Stock Markets have experienced less predictable performance latterly and many investors have turned to property as a more suitable investment option.

  • Gearing for returns - hardly any other type of investment allows you to use a bank mortgage (other people's money) to buy an asset, thereby giving you a larger pot of money to buy a larger asset, ultimately offering higher returns on an initial investment. In addition, it is possible to repay this loan with tenant's rental income (other people's money, on a monthly basis).

  • Growth for returns - Property has other important attributes that differentiate it from other forms of investment and which add to its attractiveness:

- the value of a property generally rises in line with, or in excess of inflation, so as a result of market and economic drivers

- as the owner of a property, you can often influence its capital growth and rental return by renovation and/or refurbishment. So its value can be driven by you actions too

- the right property is capable of producing strong regular cash flows from rental income (this would be the equivalent of dividends for stocks)

- the movements in property value do not strongly correlate with movement in bond and equity prices and so can complement each other as part of a portfolio

Over the last 10 years for example, Britain's property prices have risen 175% (1997-2006 - Economist 1.7.06), which averages out at 17.5% p.a. House prices grew by  £40 per day on average in 2006, growth of 9.3% (Nationwide House Price Index). Savings rates, on the other hand, generally deliver nominal or negative returns after inflation has been deducted, largely as a result of lower interest rates, particularly for higher rate tax payers.

Some commodities, such as oil and gold, have hit record prices recently, but are subject to different market forces e.g. OPEC oil price crises that need to be monitored closely. And like stocks and shares the prices can go down as quickly as they have risen. But again since the 1970's, housing has still outperformed over the longer term, with prices increasing by over 3,500% compared with oil price increases of 1,750% and gold of around 1,550% and silver of about 500%, for the same period (Source: Nationwide)

  • Source of future investment funds to generate more returns- as a property owner, it is possible to release equity against a property in a short space of time, often providing the ability to fund the next purchase.  This can also be a tax efficient way of building wealth. When money is released to crystallise profits this could be taxed, whereas if money is released to fund further investments, it does not tend to be treated in the same way.

So, whilst the value of a stock market investment can go down as well as up (as can property values), it is usual that a well-maintained property, in the right location, will appreciate in value.

Property investment is affected by global economic trends, like other forms of investment, as well as local country factors, which can alter how the investment is managed, for example - variables in leasehold, freehold, taxation and local land law.

To avoid the many pitfalls, which do vary from country to country, endeavouring to be as well-informed as possible, prior to making any financial commitment, is the best advice, whatever the form of investment. (See Due Diligence for more).  Do not be led by fashion, media hype, or less than professional sales teams who will sell you anything they have on their books, whether it is a well-researched ‘good buy' or not.

The independence of property from the performance of other major asset classes is crucial, allowing it to act as a ‘hedge' or protection against falling stock markets.  This is a strong reason why property could play a role in any balanced, investment portfolio.